In response to Spain, which I’ve detailed above, Greece, and other problem spots in Europe, the International Monetary Fund (IMF) has asked the world to provide more funds to help Europe out of its financial crisis.
Many parts of the world have expressed concern over Europe and have demanded the European Union do what is necessary to stem the financial crisis. Despite nations of the world feeling that Europe should handle its own financial crisis, the world has come together to provide the IMF with an additional $430 billion.
Japan is contributing $60.0 billion and the BRICS countries—Brazil, Russia, India, China, and South Africa—are providing $68.0 billion, although they won’t say how the money is split amongst their group. China has bought European debt in the billions of dollars to help support its largest customer during their financial crisis; China’s biggest export market is Europe.
The question I have, dear reader, is with China dealing with its slowing economy and Japan faced with its own financial crisis, and with their contributions to help Europe with its financial crisis, who is going to buy U.S. Treasuries?
In the first six months of the U.S. government’s fiscal year 2012, the budget deficit has reached $779 billion, which is better than the $829 billion in the first six months of 2011 (source: Congressional Budget Office). The U.S. Treasury is saying that, despite this better performance, the budget deficit for the full year 2012 will still come in at $1.3 trillion.
What is somewhat troubling—talk about a financial crisis of our own—is that, for February 2012, we recorded the worst monthly deficit in our history at $229 billion. The previous record was a year before in February of 2011: $223 billion. In February, the government spent $229 billion more than it took in!
In March, it was expected that the budget deficit would come in at $196 billion, but it came in worse than expected at $198 billion. However, this is much worse than March 2011, when the budget deficit came in at $188 billion.
I have written in these pages recently about the Federal Reserve buying 61% of net debt issued by the U.S. Treasuries. I have also written about the decrease in demand of U.S. Treasuries by our previous biggest buyers: China and Japan.
Japan has its own financial crisis to deal with, while China must contend with its slowing economy. Couple this with the fact that both Japan and China are pouring billions into the IMF and into Europe to help with the financial crisis, who then is going to buy U.S. Treasuries?
The only answer that makes sense is what worked in 2011 and that is the Federal Reserve. If that is the case, there will have to be a QE3. Gold bullion and those gold stocks are looking awfully cheap when QE3 is right around the corner.
Where the Market Stands; Where it’s Headed:
Yesterday, the tech-heavy NASDAQ had its biggest single daily advance in 2012, compliments of the better-than-expected quarterly earnings of Apple Inc. (NASDAQ/AAPL). It is quite interesting: The NASDAQ closed at 3,029 yesterday, still down 40% from its peak of over 5,000 in January 2000—12 years ago.
The Dow Jones Industrial Average and the S&P 500 continue to trade in a bear market rally that started in March of 2009. The rally is getting long and tired. I do not believe the potential upside reward is worth the risk for the majority of my readers.
What He Said:
“The conversation at parties is no longer about the stock market; it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate, because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.